ICBC widened its lead as the world’s most profitable lender
after reporting a 17 percent increase in net income to 44.4
billion yuan ($7 billion). That compared with the 43.4 billion-
yuan average estimate of 22 analysts in a Bloomberg survey.
Smaller rival Bank of China posted an 11 percent increase to
27.9 billion yuan.

Shares of China’s five largest banks have rallied an
average 39 percent since a 2 1/2-year low in October as concern
that Europe’s debt crisis would lead to further economic
slowdown in China eased. The Asian nation’s efforts to bolster
banks’ risk buffers and curb inflation have pushed up funding
costs, weakened the property market and triggered defaults.

“It’s inevitable for bad loans to rebound during an
economic downturn, but the pessimism on Chinese banks seems to
be overdone,” said Luo Yi, a Shenzhen-based analyst at China
Merchants Securities Co., who has a buy rating on the sector.
“Big banks have enough cushion for bad loans. Earnings in 2012
may beat estimates again as margins and loan growth won’t drop
as much as people expected.”

China’s 3,800 banks had fourth-quarter net income of $35.4
billion, a third more than the total earnings of 7,357 U.S.
lenders including Bank of America Corp. and JPMorgan Chase & Co.,
data from the China Banking Regulatory Commission and the
Federal Deposit Insurance Corp. showed.

Profit Gains Slow

The five largest banks in China, including ICBC and Bank of
Communications Co., reported a 12 percent gain in total profit
during the quarter, the slowest pace in two years, according to
data compiled by Bloomberg. Their combined profit may increase
about 19 percent this year, analysts’ estimates show.

Chinese lenders advanced 7.47 trillion yuan of new loans
last year, 6 percent less than the amount offered in 2010. The
weighted average borrowing cost rose to 8.01 percent in December,
up 1.82 percentage points from the beginning of the year,
according to the central bank.

ICBC advanced 998 billion yuan of new loans in 2011,
increasing the total by 15 percent to 7.79 trillion yuan. Non-
performing loans rose to 73 billion yuan from 69.2 billion yuan
at the end of September, according to its statement.

Overdue Loans

The lender said it expects to keep its bad-loan ratio to
below 1.2 percent at the end of this year, compared with 0.94
percent in 2011.

Bank of China advanced 682 billion yuan of new loans in
2011, taking its outstanding amount to 6.3 trillion yuan. The
lender’s non-performing loans, or those overdue for at least
three months, rose to 63.3 billion yuan at the end of last year
from 62.8 billion yuan in September.

“We are now cautious on the whole banking sector because
the economic slowdown will affect everybody to some degree as
weak loan demand hurts pricing power,” Rainy Yuan, a Shanghai-
based analyst at Masterlink Securities Corp., said before ICBC
and Bank of China’s earnings were announced.

Small Businesses Default

The economy may bottom out in the first half and the
country has already passed through the tightest credit
conditions in this cycle, Ba Shusong, a researcher at the
Development Research Center of the State Council, said March 22.

Higher borrowing costs coupled with weaker export demand
have fueled defaults at smaller businesses, causing bad loans at
the banks to rise for the first time since September 2008.

At least 14,400 small and mid-sized enterprises went
bankrupt in Zhejiang province, a hub for exporters, in the first
half of last year, Hu Chengzhong, deputy head of the Zhejiang
Federation of Industry & Commerce, said this month. About 15
percent of the region’s companies with annual sales of 20
million yuan were losing money, Hu said.

Local-Government Loans

For 2011, ICBC earned 208.3 billion yuan, up 26 percent
from the year earlier, fueled by rising loan demand and wider
margins. Net income was almost double that of JPMorgan (JPM), the
largest and most profitable U.S. bank last year.

ICBC’s capital adequacy ratio widened to 13.17 percent by
the end of December, from 12.51 percent three months earlier.
The ratio also expanded at Bank of China to 12.8 percent. The
core capital adequacy ratio of both banks stood at 10.07 percent.

ICBC had outstanding loans to local government financing
vehicles of 680 billion yuan at the end of 2011, Senior
Executive Vice President Li Xiaopeng told reporters in Beijing
yesterday. Of those credits, 0.73 percent were non-performing,
President Yang Kaisheng said.

Loans to micro and small companies rose 46 percent last
year and the bank targets a level above 1.1 trillion yuan by the
end of 2015, Yang said.